FASB Likely to Delay Merger Accounting Rule Again

NORWALK, Conn.-The Financial Accounting Standards Board will likely delay its targeted effective date for the merger accounting rule yet again. The undertaking to switch accounting for the mergers of mutuals from the pooling method to the purchase method for uniformity with their for-profit brethren began in 1996, according to Patelco Credit Union Chief Financial Officer Scott Waite. He serves as the first credit union representative ever on FASB's Financial Accounting Standards Advisory Council as well as on its Small Business Advisory Committee. The project gained momentum in 2002, he recalled, but it has faced a couple of delays in implementation since then. "One of the reasons for [length of the project] is it is a joint project with the International Accounting Standards Board," Waite explained. "The other thing that makes this a little difficult is this is three subprojects they're rolling together." "We had been expecting an effective date of January 1, 2007 for some time. The comment period just ended in the third quarter and we expected a final rule by June of this year," he said. "The latest delay means that a final rule is expected by June of 2007 and a probable effective date of January 2008." FASB and the IASB are planning to schedule `redeliberations,' which will take approximately one year, according to FASB's Web site (www.fasb.org). When completed the boards will reconsider the targeted effective date again. Credit unions, due to of the definition of `net worth' in the Federal Credit Union Act, would not be able to count a merging credit union's net worth with its own under FASB's exposure draft. This would artificially cause the surviving credit union's net worth to plummet leading to trouble with Prompt Corrective Action. As FASB is making the change for uniformity, they have not been open to a carve out for credit unions. However, the quasi-governmental standards-setting body is not opposing credit unions' legislative efforts. To fix this glitch, the credit union trades have pushed the Net Worth Amendment for Credit Unions Act (H.R. 1042) through to full and unanimous House approval and worked to get the language added to the Financial Services Regulatory Relief Act (H.R. 3505) and the Credit Union Regulatory Improvements Act (H.R. 2317). "Our goal is to have the legislation in place by the time the FASB rule change takes effect," NAFCU Director of Legislative Affairs Brad Thaler said. Deference has been given to the regulatory relief bill, but if that does not look like it will become law in time for the accounting change, he said, there are a number of Senators supportive of the net worth legislation as well. Waite agreed, "I've said before, the delay and previous delays help us get those legislative changes in place." He continued, "The biggest thing about the FASB rule is we are a consolidating industry and this is a major shift in accounting." He added that the change would be particularly tough on smaller credit unions, but larger institutions, like Patelco, might be willing to help out. He said he also expects the state leagues to get active in this as well. The latest delay centers on establishing the fair value of assets and liabilities, Waite explained. "A certain amount of that goes on now," he said, but usually annually and it is a lot of work. Specifically at issue is how to value core deposits like checking, savings, and money market accounts; there is a question of whether they have "additional tangible value" in relationships, such as fees on checking accounts. This, Waite said, is where credit unions are "going to have to get real creative" because they are not used to doing that. Another issue is the combination of the allowance for loan and lease losses (ALLL). Under the current system everything is combined but after the proposed change becomes effective it is netted out, which could lead to a lack of transparency. For example, a merging credit union has a $1 million loan portfolio with $100,000 in ALLL. That is netted so that it appears the surviving institution took on an additional $900,000 in loans without making adjustments to the ALLL. This is a particularly critical issue for credit unions that do a lot of mergers, according to the CFO. "I think [the latest delay] is a good thing. I want to encourage credit unions, let's not just fall asleep on this thing," Waite said. It gives credit unions looking to merge a longer window of opportunity to get in under the current system if they want to. Waite is in his fourth year on the Financial Accounting Standards Advisory Council, which is the maximum a representative can serve. His service on the Small Business Advisory Committee, he said, is not term-limited. -